High Executive Pay Costs In Morale, Too

Commentary

Herb Kelleher, the popular and very successful 65-year-old chairman and chief executive officer of Southwest Airlines, won't get a raise this year.

Or next year, or the next year, or the year after. Imagine that.

Kelleher agreed to freeze his salary at a relatively modest $395,000 a year for four years, part of a deal with the Southwest Airlines Pilots Association, which also agreed to a four-year wage freeze for its members.

The executive will not be hurting, though. Although his salary is frozen, he gets stock options potentially worth millions of dollars. How many millions depends on how the company's shares perform in the market.

All and all, the deal Kelleher and the pilots struck seems eminently fair. Kelleher's salary is tied to those of people who work for him, and his big rewards are dependent on the company's long-term success.

The news is that this is a rare event.

In this era of corporate penny pinching amid record profits, corporate executives are being increasingly awarded significant increases in their base pay plus bonuses almost as large as their salaries plus potentially lucrative stock options.

All this is happening at a time when rank-and-file employees are being held to cost-of-living raises - if that.

A matter of public record

What brings this to mind is the recent survey of executive compensation compiled by the Sun-Sentinel and The Orlando Sentinel. It showed, among other things, that the gulf between pay of average workers and corporate executives is growing larger.

It is a rare corporate executive in Florida (or in corporations with a major presence in Florida) who didn't get a raise three to seven times more than cost-of-living increases in base pay plus huge bonuses, stock options not withstanding.

The salaries are public information since the Securities and Exchange Commission requires the information to be included with shareholder proxy statements, which are in turn filed as public records with the SEC. As a result, the salaries are topics of conversation when employees gather around the office water coolers or meet in the elevators.

I wonder if company directors who award big salaries and bonuses know their real cost.

Do they realize how much the big awards affect morale? Do they realize that the figures get quoted dozens - maybe hundreds - of times a month in a major corporation and maybe thousands of times a year? Do they realize the figures are the subject of bitter jokes whenever employees are asked to cut expenses? Do directors of non-union companies realize they are creating exactly the kind of atmosphere they don't want if they want to keep unions out?

The other side of the coin, of course, is that corporations must pay good salaries to attract and retain good executives. These salaries, it is argued, should be comparable to others paid by similar companies in similar industries.

Leave government out

The problem with this reasoning is that it results in a corporate salary spiral totally unconnected with work done by the executives. Executive-compensation committees retain compensation "experts" who do little but survey the competition and then find a reason to justify a little more for their man.

They don't give a hoot about the detrimental affects of such a system on morale.

How should executive salaries be set? I asked a few colleagues and got some delightfully flip answers.

"A pat on the back would do," said one. "I get a lot of those."

"No more than 400 times the average salary unless they can come down and change paper in the fax machine, too," said another.

There was, in fact, a serious proposal in Congress not long ago to limit corporate salaries to a multiple of average salaries. Happily, it got nowhere. Rigid government formulas aren't good for anything.

But I do think it makes sense to tie executive compensation to overall employee compensation. Only the most egotistical executive would think corporate success is tied entirely to decisions made in the executive suite.

Hard work by dedicated employees is likely to determine how successful those decisions will turn out. At least that's what Kelleher and pilots at Southwest Air agreed.

Sun-Sentinel columnist Jack Nease comments on business and economic issues affecting South Florida on Sunday, Tuesday and Thursday.